Casual stock market observers who look no further than the S&P 500 (^GSPC -1.20%) to judge stock market performance have to believe that everything's looking rosy once again. After falling in response to the government shutdown, the stock market has roared back higher over the past two days as optimism grows that lawmakers will reach a favorable conclusion to the current crisis.
Many investors believe that the bull market that has run with hardly a pause since March 2009 is getting long in the tooth. But when you look beyond large-cap U.S. stocks, you can see some additional signs of support that are often absent when the S&P 500 start to top out. Let's take a look at three reasons to feel more confident about the S&P's recent run:
1. Small-cap stocks are also at record levels.
Often, when economic prospects become less certain, small-cap stocks become less popular than their larger counterparts. Intuitively, that reaction makes sense, as investors gravitate toward safer stocks during times of uncertainty, giving up the larger potential growth of small-cap stocks in exchange for greater downside protection.
But over the past year, small-cap stocks have actually outperformed large-caps by a wide margin, with the Russell 2000's (RUSSELLINDICES: ^RUT) return beating the S&P 500 by more than 10 percentage points. With the Russell within half a percent of setting a new all-time high yesterday, small-cap stocks are clearly still attracting investor attention, suggesting the overall bull market has further to run.
2. International stocks have started to recover.
For a long time, U.S. stocks were outperforming most of the rest of the world, leaving struggling international stock markets behind. In particular, Europe's recession weighed on stock market across the Atlantic. Moreover, emerging markets lagged badly during the first part of the year, as investors grew wary of overheating economies that were finally showing signs of slowing growth. The broad-based iShares MSCI Emerging Markets ETF (EEM -0.64%) was down more than 10% during the first half of the year, while the Vanguard Europe ETF (VGK -0.15%) managed only a 1% gain.
Over the past few months, though, conditions overseas have started to improve. The euro has picked up ground against the U.S. dollar, and even struggling emerging markets have succeeded in hitting bottom and starting to turn around. In China, Internet-search giant Baidu (BIDU -1.36%) has soared more than 60% in just over three months as investors who gave up the company for dead have realized that it won't just roll over at the first threat of competition. China is starting to pick up steam again, and Baidu is having success with its mobile initiatives to drive more traffic.
3. Market timers are about to come back into the market.
Remember the "Sell in May" strategy? With three weeks to go, those who sold out of the market at the end of April have missed out on gains of almost 7%. Yet irrespective of the market's performance, mechanical investors who follow that seasonal strategy will start pouring money back into the market at the beginning of November, and that demand could help produce further gains for the S&P 500.
Again, none of these indicators is guaranteed to prevent a downturn. But for investors looking for signs of discord within the market, few of the indications that one typically sees before big market reversals are present right now.
